Chapter 3--Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows

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1 Chapter 3--Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows Student: 1. Which of the following types of organizations is most likely to have a raw materials inventory account? A. Retailer B. Manufacturer C. Service provider D. Governmental unit 2. Which of the following statements about manufacturing in a traditional environment is true? A. Factories are organized so that machines that are dissimilar are grouped together. B. It is not desirable for extra raw materials inventory to be on hand. C. The process begins with a customer order and products are "pulled" through the manufacturing process. D. Partially completed inventory is accumulated in a work-in-process inventory account. 3. A traditional manufacturing environment does not have which of the following? A. An automated production process B. Trained employees C. Extremely low levels of work-in-process inventory D. Product cost information available 4. Which of the following statements is true about manufacturing companies over the past 20 years? A. The grouping of machines into "manufacturing cells" has increased. B. Carrying large amounts of inventory is often less costly than carrying small amounts of inventory. C. They have moved from a "pull" approach to more of a "push" approach. D. The basic production process has changed very little over the past 20 years. 5. Which of the following statements regarding the traditional manufacturing environment is not true? A. Machines are often put into "manufacturing cells" whereby dissimilar machines are grouped together. B. Raw material is "pushed" to the next production area in anticipation of customer demand. C. Manufacturers often have raw material, work-in-process, and finished goods inventory on hand. D. Buffers of inventory may result in workers being less efficient.

2 6. Lean production is focused on eliminating waste associated with all of the following except A. moving products further than is required. B. down time caused by people waiting for work to do. C. providing excessive customer service. D. over-processing a product. 7. Under ideal conditions, companies operating in a environment would reduce inventories of raw materials, work-in-process and finished goods to very low levels or even zero. A. service B. just-in-time C. traditional manufacturing D. merchandising 8. Companies that operate in a lean production and just-in-time manufacturing environment are more likely to experience which of the following? A. Reduced manufacturing flexibility B. Increased levels of raw materials inventory C. Increased production time D. Increased product quality 9. A "manufacturing cell" is defined as a(n): A. grouping of most of the machinery and equipment needed to make a product being available in one area of the factory. B. grouping of the factory into areas where machinery and equipment of the same exact type are grouped together. C. area in the raw materials storeroom where similar raw materials are grouped together. D. area in the finished goods storeroom where similar finished goods are grouped together. 10. In a just-in-time environment, the production process often begins when: A. products are moved from raw materials to work-in-process. B. a customer places an order. C. the product is delivered to a customer. D. products are moved from work-in-process to finished goods. 11. Which of the following is an advantage of lean production and just-in-time (JIT) manufacturing systems? A. If factory workers go on strike, the company can still deliver the product to the customer on time. B. The quality of the product is often improved. C. Less-skilled employees making a lower wage will replace higher paid employees. D. An increase in the production time to make a product.

3 12. Which of the following is a disadvantage of lean production and just-in-time (JIT) manufacturing systems? A. Increased customer delivery time B. Increased product defects C. Decreased flexibility of manufacturing facilities D. Increased reliance on fewer suppliers 13. Which of the following statements is true regarding the lean production and just-in-time (JIT) manufacturing systems? A. Customers are often less satisfied with the purchased product. B. The number of product defects often increases. C. The number of suppliers the company can purchase raw materials from often increases. D. The factory is often restructured where dissimilar machines are grouped together. 14. Which of the following is an advantage of the lean production and just-in-time (JIT) manufacturing systems? A. Reduced reliance on a select number of suppliers B. Increased inventory levels in case of unpredicted customer demand C. Reduced reliance on highly skilled employees D. Reduced product defects 15. Which of the following is a characteristic of a lean production and just-in-time (JIT) manufacturing environment but not of a traditional manufacturing environment? A. Increased inventory levels B. Increased product defects C. Increased reliance on a select number of suppliers D. Increased production time 16. Which of the following is a characteristic of a traditional production environment but not of a lean production and just-in-time (JIT) manufacturing environment? A. Increase in the need for highly skilled labor B. Increase in the need for highly reliable suppliers C. Reduction in the motivation of the work force D. Reduction in the amount of time it takes to produce a product

4 17. Which of the following is a risk that would more likely be seen in a lean production and just-in-time manufacturing environment than in a traditional production environment? A. Reduced customer satisfaction due to higher product defects B. Reduced raw material supply bringing the production process to a halt C. Increased inventory storage costs D. Increased production time resulting in lost sales 18. Which of the following is not a type of manufacturing cost? A. Direct material costs B. Administrative costs C. Factory overhead costs D. Direct labor costs 19. In general, costs incurred in the factory that do not qualify as either direct material or direct labor are called: A. manufacturing costs. B. manufacturing overhead. C. nonmanufacturing costs. D. selling and administrative costs. 20. Manufacturing costs typically consist of: A. direct materials, direct labor, and administrative costs. B. production and shipping costs. C. direct materials, direct labor, and manufacturing overhead. D. manufacturing overhead and selling costs. 21. Materials that can be directly traced to a particular product and become an integral part of the finished product are called: A. indirect materials. B. direct materials. C. supplies. D. product materials. 22. Which of the following statements is true regarding manufacturing costs? A. They will be appear on the income statement as the product is made. B. They will not appear on the income statement or the balance sheet until the product is completed. C. They will appear on the balance sheet as an inventory cost until the product is sold. D. They will appear on the balance sheet as an inventory cost after the product is sold.

5 23. Which of the following statements is false regarding nonmanufacturing costs? A. They are incurred outside the factory. B. They include selling and administrative costs. C. They are not directly incurred to make a product. D. They include indirect materials and indirect labor costs. 24. Which of the following would most likely be classified as indirect materials? A. Wood used to build a customized bookshelf B. Lubricants used on factory machinery C. Supplies used by the administrative employees D. Packing pellets used for shipping products to customers 25. Which of the following types of employees would most likely have their wage be classified as direct labor? A. Factory maintenance worker B. Factory supervisor C. Managerial accountant D. Assembly-line factory worker 26. Which of the following types of employees would most likely have their wage be classified as indirect labor? A. Factory supervisor B. Managerial accountant C. Salesperson D. Machine operator 27. Manufacturing overhead includes: A. advertising costs. B. indirect materials. C. sales commissions. D. shipping charges for finished goods. 28. Which of the following is not an example of a manufacturing overhead cost? A. Shipping charges on finished products B. Indirect materials C. Indirect labor D. Depreciation on factory equipment

6 29. Which of the following is an example of a manufacturing overhead cost? A. Supplies used by administrative staff B. Supplies used by a salesperson C. Materials easily traced to a specific product D. Lubricants used by factory maintenance workers 30. Which of the following is not an example of manufacturing overhead costs? A. Fringe benefits paid to assembly-line workers B. Depreciation of factory machinery C. Overtime pay to factory supervisors D. Insurance on factory machinery 31. Which of the following is a product cost? A. Insurance on factory machinery B. Insurance on delivery trucks C. Lease expense on office computer D. Advertising costs 32. Jasper Corporation Jasper Corporation incurred the following costs in April: Salesperson's salaries $40,000 Factory maintenance worker $20,000 Factory insurance 12,000 Administrative utilities 4,000 Factory supervisor salary 30,000 Administrative supplies 1,000 Advertising 15,000 Delivery truck insurance 2,000 Factory machine operator 22,000 Factory machine depreciation 6,000 Direct materials used 25,000 Receptionist salary 18,000 Refer to the Jasper Corporation information above. Total product costs are: A. $130,000 B. $155,000 C. $115,000 D. $117, Jasper Corporation Jasper Corporation incurred the following costs in April: Salesperson's salaries $40,000 Factory maintenance worker $20,000 Factory insurance 12,000 Administrative utilities 4,000 Factory supervisor salary 30,000 Administrative supplies 1,000 Advertising 15,000 Delivery truck insurance 2,000 Factory machine operator 22,000 Factory machine depreciation 6,000 Direct materials used 25,000 Receptionist salary 18,000

7 Refer to the Jasper Corporation information above. Total period costs are: A. $86,000 B. $38,000 C. $40,000 D. $80, The type of costing that takes into account costs incurred by all the activities throughout a product's entire life is called: A. life-cycle costing. B. value-chain costing. C. full-costing. D. complete-costing. 35. The set of activities that increases the value of an organization's products and services is called the: A. activity chain. B. value chain. C. profit chain. D. life chain. 36. Which of the following statements regarding life-cycle and/or product costing is true? A. Life-cycle costing is confined to direct materials, direct labor, and manufacturing overhead. B. Life-cycle costing would include research and development costs, advertising costs, and shipping costs. C. Product costing would include marketing and distribution costs. D. Product costing would include research and development costs, direct materials, direct labor, and manufacturing overhead. 37. Which of the following is an "upstream cost" in the value chain? A. Advertising costs B. Sales staff salaries C. Shipping costs D. Research and development costs 38. Which of the following is a "downstream cost" in the value chain? A. Research costs B. Shipping costs C. Production costs D. Product design costs

8 39. Products and their costs flow through a production facility in the following order: A. Work-in-process, finished goods, cost of goods sold B. Raw materials, work-in-process, finished goods, cost of goods sold C. Work-in-process, raw materials, cost of goods sold, finished goods D. Work-in-process, cost of goods manufactured, cost of goods sold 40. Which of the following increases the work-in-process account? A. Cost of goods sold B. Raw material purchased C. Administrative costs D. Raw material used 41. Which of the following decreases the work-in-process account? A. Raw materials used B. Cost of goods manufactured C. Direct labor D. Manufacturing overhead 42. Product costs that transfer into finished goods inventory are called: A. cost of goods manufactured. B. cost of goods sold. C. period costs. D. raw materials used. 43. Product costs that transfer out of finished goods are called: A. work-in-process. B. cost of goods manufactured. C. cost of goods sold. D. period costs. 44. Which of the following statements accurately describes manufacturing cost flows in a just-in-time (JIT) environment? A. Direct labor and overhead are maintained in a work-in-process account for long periods of time. B. There is little need to maintain a cost of goods sold account. C. There is little need to maintain raw materials, work-in-process, or finished goods accounts. D. Manufacturing costs are maintained in the finished goods account for long periods of time.

9 45. Which of the following types of companies would be the least likely to have the following cost pattern? Raw materials Work-in-Process Finished Goods Cost of goods sold A. Tire manufacturer B. Computer software manufacturer C. Retailer/merchandiser D. Construction company 46. Clyde Retailer's is a local merchandiser which buys vintage clothing and sells it to local college students. Clyde began the year with inventory costing $60,000. During the year inventory costing $300,000 was purchased. At the end of the year, inventory costing $45,000 still remained. What was Clyde's cost of goods sold for the year? A. $255,000 B. $285,000 C. $300,000 D. $315, The journal entry to record raw materials used would include a: A. debit to finished goods. B. debit to raw materials. C. debit to work-in-process. D. debit to cost of goods sold. 48. In 2009 Bradshaw Inc. incurred $40,000 of manufacturing overhead costs which will be paid for in 2010 Which of the following would be the correct journal entry to record this transaction? A. Cost of goods sold 40,000 Accounts payable 40,000 B. Inventory 40,000 Accounts payable 40,000 C. Overhead expenses 40,000 Accounts payable 40,000 D. Work-in-process inventory 40,000 Accounts payable 40, The journal entry to record cost of goods manufactured would include a: A. credit to work-in-process. B. credit to finished goods. C. debit to work-in-process. D. debit to cost of goods sold.

10 50. When the cost of a product is matched with its sales price, the result (difference) is called: A. net income. B. gross margin. C. cost of goods sold. D. cost of goods manufactured. 51. When nonmanufacturing costs are subtracted from gross margin, the result is called: A. cost of goods sold. B. net income. C. sales. D. nonmanufacturing income. 52. Michael's Manufacturing, Inc. Michael's Manufacturing, Inc. has the following information available for the month of July: Raw materials inventory $50,000 $ 62,000 Work-in-process inventory 80,000 55,000 Finished goods inventory 24,000 35,000 Raw materials purchased $120,000 Direct labor costs 60,000 Overhead costs 45,000 Refer to the Michael's Manufacturing, Inc. information above. Raw materials used for July is: A. $112,000 B. $108,000 C. $120,000 D. $132, Michael's Manufacturing, Inc. Michael's Manufacturing, Inc. has the following information available for the month of July: Raw materials inventory $50,000 $ 62,000 Work-in-process inventory 80,000 55,000 Finished goods inventory 24,000 35,000 Raw materials purchased $120,000 Direct labor costs 60,000 Overhead costs 45,000

11 Refer to the Michael's Manufacturing, Inc. information above. Cost of goods manufactured for July is: A. $188,000 B. $250,000 C. $238,000 D. $213, Michael's Manufacturing, Inc. Michael's Manufacturing, Inc. has the following information available for the month of July: Raw materials inventory $50,000 $ 62,000 Work-in-process inventory 80,000 55,000 Finished goods inventory 24,000 35,000 Raw materials purchased $120,000 Direct labor costs 60,000 Overhead costs 45,000 Refer to the Michael's Manufacturing, Inc. information above. Cost of goods sold for July is: A. $227,000 B. $202,000 C. $249,000 D. $239, Nate's Novelties, Inc. Nate's Novelties, Inc. has the following information available for July: Raw materials inventory $12,000 $ 9,000 Work-in-process inventory 35,000 20,000 Finished goods inventory 20,000 44,000 Raw materials purchased $25,000 Direct labor costs 55,000 Overhead costs 35,000 Refer to the Nate's Novelties, Inc. information above. Raw materials used for July is: A. $21,000 B. $22,000 C. $25,000 D. $28,000

12 56. Nate's Novelties, Inc. Nate's Novelties, Inc. has the following information available for July: Raw materials inventory $12,000 $ 9,000 Work-in-process inventory 35,000 20,000 Finished goods inventory 20,000 44,000 Raw materials purchased $25,000 Direct labor costs 55,000 Overhead costs 35,000 Refer to the Nate's Novelties, Inc. information above. Cost of goods manufactured for July is: A. $153,000 B. $103,000 C. $130,000 D. $133, Nate's Novelties, Inc. Nate's Novelties, Inc. has the following information available for July: Raw materials inventory $12,000 $ 9,000 Work-in-process inventory 35,000 20,000 Finished goods inventory 20,000 44,000 Raw materials purchased $25,000 Direct labor costs 55,000 Overhead costs 35,000 Refer to the Nate's Novelties, Inc. information above. Cost of goods sold for July is: A. $106,000 B. $157,000 C. $129,000 D. $109,000

13 58. Scott Products Scott Products manufactures high-quality running shoes. The following information is available for 2009: Raw materials inventory $ 65,000 $ 82,000 Work-in-process inventory 280, ,000 Finished goods inventory 90, ,000 Raw materials purchased $250,000 Direct labor costs 340,000 Factory rent 60,000 Factory supplies 20,000 Factory utilities 15,000 Factory depreciation 30,000 Marketing costs 25,000 Administrative costs 100,000 In addition, 42,400 pairs were produced in 2009out of which 40,900 pairs were sold for $70 each. Refer to the Scott Products information above. Cost of goods manufactured for 2009 is: A. $990,000 B. $973,000 C. $848,000 D. $865, Scott Products Scott Products manufactures high-quality running shoes. The following information is available for 2009: Raw materials inventory $ 65,000 $ 82,000 Work-in-process inventory 280, ,000 Finished goods inventory 90, ,000 Raw materials purchased $250,000 Direct labor costs 340,000 Factory rent 60,000 Factory supplies 20,000 Factory utilities 15,000 Factory depreciation 30,000 Marketing costs 25,000 Administrative costs 100,000 In addition, 42,400 pairs were produced in 2009out of which 40,900 pairs were sold for $70 each. Refer to the Scott Products information above. What is net income for 2009? (ignore taxes) A. $1,920,000 B. $2,025,000 C. $1,890,000 D. $2,045,000

14 60. Thompson Inc. has the following selected information available for 2009: Cost of goods manufactured $180,000 Cost of goods sold 150,000 Direct labor costs incurred 45,000 Raw material purchased 90,000 Raw material used 80,000 work-in-process 15,000 work-in-process 9,000 Manufacturing overhead costs in 2005 amounted to: A. $39,000 B. $55,000 C. $49,000 D. $31, Hillsborough Street Manufacturing Inc. Hillsborough Street Manufacturing Inc. incurred the following costs in 2009: Direct materials used $37,000 Direct labor costs 45,000 Factory rent and utilities 18,000 Factory equipment depreciation 10,000 Marketing expenses 3,000 Administrative expenses 9,000 50,000 units were produced during the year out of which 40,000 units were sold for $10 each. There was no beginning or ending raw materials or work-in-process inventory. Refer to the Hillsborough Street Manufacturing Inc. information above. What is the product cost per unit? A. $3.05 B. $2.75 C. $2.44 D. $ Hillsborough Street Manufacturing Inc. Hillsborough Street Manufacturing Inc. incurred the following costs in 2009: Direct materials used $37,000 Direct labor costs 45,000 Factory rent and utilities 18,000 Factory equipment depreciation 10,000 Marketing expenses 3,000 Administrative expenses 9,000

15 50,000 units were produced during the year out of which 40,000 units were sold for $10 each. There was no beginning or ending raw materials or work-in-process inventory. Refer to the Hillsborough Street Manufacturing Inc. information above. What is cost of goods sold for the year? A. $ 88,000 B. $ 97,600 C. $122,000 D. $110, Hillsborough Street Manufacturing Inc. Hillsborough Street Manufacturing Inc. incurred the following costs in 2009: Direct materials used $37,000 Direct labor costs 45,000 Factory rent and utilities 18,000 Factory equipment depreciation 10,000 Marketing expenses 3,000 Administrative expenses 9,000 50,000 units were produced during the year out of which 40,000 units were sold for $10 each. There was no beginning or ending raw materials or work-in-process inventory. Refer to the Hillsborough Street Manufacturing Inc. information above. Out of the above costs, what amount remains on the balance sheet at the end of 2009? A. $12,000 B. $20,000 C. $22,000 D. $24, Hillsborough Street Manufacturing Inc. Hillsborough Street Manufacturing Inc. incurred the following costs in 2009: Direct materials used $37,000 Direct labor costs 45,000 Factory rent and utilities 18,000 Factory equipment depreciation 10,000 Marketing expenses 3,000 Administrative expenses 9,000 50,000 units were produced during the year out of which 40,000 units were sold for $10 each. There was no beginning or ending raw materials or work-in-process inventory. Refer to the Hillsborough Street Manufacturing Inc. information above. What is net income for the year? A. $278,000 B. $312,000 C. $378,000 D. $300,000

16 65. Hudson Inc. Hudson Inc. has the following information available for September: Raw materials $ 8,000 $ 5,000 Work-in-process 30,000 40,000 Finished goods 7,000 3,000 Raw materials purchased 25,000 Direct labor costs 70,000 Manufacturing overhead costs 30,000 Administrative costs 12,000 Marketing costs 6,000 Refer to the Hudson Inc. information above. Total nonmanufacturing costs for September are: A. $113,000 B. $161,000 C. $ 18,000 D. $ 43, Hudson Inc. Hudson Inc. has the following information available for September: Raw materials $ 8,000 $ 5,000 Work-in-process 30,000 40,000 Finished goods 7,000 3,000 Raw materials purchased 25,000 Direct labor costs 70,000 Manufacturing overhead costs 30,000 Administrative costs 12,000 Marketing costs 6,000 Refer to the Hudson Inc. information above. Cost of goods manufactured for September is: A. $118,000 B. $136,000 C. $115,000 D. $133,000

17 67. Hudson Inc. Hudson Inc. has the following information available for September: Raw materials $ 8,000 $ 5,000 Work-in-process 30,000 40,000 Finished goods 7,000 3,000 Raw materials purchased 25,000 Direct labor costs 70,000 Manufacturing overhead costs 30,000 Administrative costs 12,000 Marketing costs 6,000 Refer to the Hudson Inc. information above. Cost of goods sold for September is: A. $119,000 B. $143,000 C. $140,000 D. $122, Hudson Inc. Hudson Inc. has the following information available for September: Raw materials $ 8,000 $ 5,000 Work-in-process 30,000 40,000 Finished goods 7,000 3,000 Raw materials purchased 25,000 Direct labor costs 70,000 Manufacturing overhead costs 30,000 Administrative costs 12,000 Marketing costs 6,000 Refer to the Hudson Inc. information above. Sales revenue for September totaled $400,000. Net income for September is: A. $257,000 B. $260,000 C. $264,000 D. $278, In a traditional manufacturing environment, as the cost of goods sold account increases, which account is most likely decreasing? A. Work-in-process inventory B. Finished goods inventory C. Raw materials inventory D. Cash

18 70. Jones Manufacturing Inc. Jones Manufacturing Inc. incurred the following costs in November: Direct labor $50,000 Advertising costs $ 3,000 Indirect labor 20,000 Factory rent 10,000 Administrative salaries 25,000 Factory depreciation 6,000 Direct materials purchased 23,000 Administrative rent 5,000 Indirect materials used 4,000 Administrative depreciation 7,000 In addition, the following information is also available: Raw materials $ 5,000 $ 8,000 Work-in-process 60,000 55,000 Finished goods 17,250 9,200 Number of units produced Number of units sold (sales price of $25 per unit) 20,000 units 21,400 units Refer to the Jones Manufacturing Inc. information above. Cost of goods manufactured in November is: A. $ 91,000 B. $115,000 C. $155,000 D. $143, Jones Manufacturing Inc. Jones Manufacturing Inc. incurred the following costs in November: Direct labor $50,000 Advertising costs $ 3,000 Indirect labor 20,000 Factory rent 10,000 Administrative salaries 25,000 Factory depreciation 6,000 Direct materials purchased 23,000 Administrative rent 5,000 Indirect materials used 4,000 Administrative depreciation 7,000 In addition, the following information is also available: Raw materials $ 5,000 $ 8,000 Work-in-process 60,000 55,000 Finished goods 17,250 9,200 Number of units produced Number of units sold (sales price of $25 per unit) 20,000 units 21,400 units

19 Refer to the Jones Manufacturing Inc. information above. The product cost per unit in November is: A. $4.55 B. $7.75 C. $5.75 D. $ Jones Manufacturing Inc. Jones Manufacturing Inc. incurred the following costs in November: Direct labor $50,000 Advertising costs $ 3,000 Indirect labor 20,000 Factory rent 10,000 Administrative salaries 25,000 Factory depreciation 6,000 Direct materials purchased 23,000 Administrative rent 5,000 Indirect materials used 4,000 Administrative depreciation 7,000 In addition, the following information is also available: Raw materials $ 5,000 $ 8,000 Work-in-process 60,000 55,000 Finished goods 17,250 9,200 Number of units produced Number of units sold (sales price of $25 per unit) 20,000 units 21,400 units Refer to the Jones Manufacturing Inc. information above. Net income for November is: (ignore taxes) A. $371,950 B. $411,950 C. $369,150 D. $382, Johnson Manufacturing has the following selected information available for the year: Direct material purchased $ 40,000 Direct material used 45,000 Direct labor incurred 75,000 Manufacturing overhead incurred 50,000 Cost of goods manufactured 100,000 In addition, the cost of the finished goods inventory increased by $10,000 from the beginning to the end of the year. Cost of goods sold for the year is: A. $ 80,000 B. $170,000 C. $ 90,000 D. $110,000

20 74. Chancellor Industries, a manufacturing company, prepays its insurance coverage for a two-year period. The premium for two-year's worth of coverage is $14,400 and is paid at the beginning of the first year. Two-thirds of the premium relates to factory operations and one-third relates to selling and administrative activities. The amount of premium that should be recorded as a product cost for the first year is: A. $ 4,800 B. $ 2,400 C. $ 9,600 D. $14, Clapton Inc. would like to prepare an income statement for March. Their production department records show that total product costs in March were $225,000 when 50,000 units were produced. Their sales department records show that 46,000 units were sold for $16 each. Monthly administrative and marketing expenses totaled $60,000. What should be net income for March? A. $529,000 B. $473,800 C. $451,000 D. $469, Which of the following statements is true regarding period costs? A. They "attach" themselves to the product. B. They will appear the balance sheet until the product is sold. C. They will appear on the income statement in the year they are incurred. D. They will not impact gross margin or net income. 77. Franklin Street Manufacturing Franklin Street Manufacturing has the following cost information available for 2009: Direct materials used $10,000 Direct labor costs 25,000 Factory overhead 20,000 Marketing expenses 4,000 Administrative expenses 6,000 20,000 units were produced during the year out of which 19,000 units were sold for $10 each. Refer to the Franklin Street Manufacturing information above. What is cost of goods sold for 2009? A. $55,000 B. $52,250 C. $61,750 D. $65,000

21 78. Franklin Street Manufacturing Franklin Street Manufacturing has the following cost information available for 2009: Direct materials used $10,000 Direct labor costs 25,000 Factory overhead 20,000 Marketing expenses 4,000 Administrative expenses 6,000 20,000 units were produced during the year out of which 19,000 units were sold for $10 each. Refer to the Franklin Street Manufacturing information above. Out of the above costs, what amount remains on the balance sheet at the end of 2009? A. $ 2,750 B. $12,750 C. $10,000 D. $ 3, Franklin Street Manufacturing Franklin Street Manufacturing has the following cost information available for 2009: Direct materials used $10,000 Direct labor costs 25,000 Factory overhead 20,000 Marketing expenses 4,000 Administrative expenses 6,000 20,000 units were produced during the year out of which 19,000 units were sold for $10 each. Refer to the Franklin Street Manufacturing information above. What is net income for 2009? A. $127,750 B. $137,750 C. $125,000 D. $128,250

22 80. Brenda's Bakery has the following information available for October: Endin g Raw materia ls $ 4,000 $ 2,0 00 Work-i 32,000 17,00 n-proc 0 ess Finishe 5,000 3,000 d goods Cost of goods manufactured 88,000 Cost of goods sold 90,000 Direct labor costs 35,000 Factory rent and depreciation 10,000 Selling 3,000 expens es How much raw material was purchased in October? A. $23,000 B. $25,000 C. $26,000 D. $28, Provide specific examples of why accurate product or service costing information is important for internal purposes. 82. Briefly compare a traditional manufacturing environment with a lean production and just-in-time (JIT) manufacturing environment.

23 83. Describe the cost accumulation process in a traditional manufacturing environment versus a just-in-time (JIT) environment. 84. Identify at least two characteristics of a lean production and just-in-time (JIT) manufacturing environment. 85. Identify some of the benefits and risks of a lean production and just-in-time (JIT) environment. 86. Describe each of the following as either a product or period cost. a. factory depreciation f. direct materials b. indirect labor g. indirect materials c. administrative salaries h. advertising d. direct labor i. factory insurance e. utilities used in the factory j. utilities used in the administrative offices

24 87. Briefly describe the difference between a manufacturing and a nonmanufacturing cost. 88. Identify with an "X" the following costs as either a manufacturing (product) or nonmanufacturing (period) cost. If it is a manufacturing cost, further identify it as either direct material (DM), direct labor (DL), or overhead (OH). Manufacturing Cost Indirect labor Factory supplies Material easily traced to product Administrative salaries Factory rent Indirect materials Shipping costs Administrative building utilities Factory equipment depreciation Machine operator Nonmanufa cturing Cost DM DL OH 89. Indicate whether each of the following accounts would be found on the balance sheet (BS) or income statement (IS). a. Work-in-process d. Raw materials b. Sales e. Cost of goods sold c. Finished goods f. Selling and administrative expenses

25 90. How does life-cycle costing differ from product costing? 91. Classify the following as either direct labor (DL), indirect labor (IL), or a period cost (P). a. factory maintenance worker b. company president c. assembly-line worker d. salesperson working on commission e. factory supervisor f. administrative assistant g. machine operator 92. Classify each of the following as either a direct material (DM), indirect material (IM), or period cost (P). a. wood used to build custom bookshelves b. sandpaper, glue, and nails used to build customer bookshelves. c. paper supplies used in the administrative offices. d. computer chips used in computer e. cleaning supplies used in the factory

26 93. Capital Manufacturing produces a unique souvenir product for various museums around the country. During the year, the company incurred the following costs: Direct material used $50,000 Direct labor 80,000 Manufacturing overhead 30,000 Marketing expenses 10,000 Administrative expenses 20,000 During the year, 25,000 units were produced out of which 20,000 units were sold for $15 each. Required: A. Calculate the total product costs incurred for the year. B. What is the product cost per unit? C. What is cost of goods sold for the year? D. What is net income for the year?

27 94. McClintock Manufacturing Inc. has the following information available for the month of July: End ing Raw material s inventor y $12,000 $ 8,000 Work-in 45,000 55,0 -process 00 inventor y Finished goods inventor y Raw material s purchase d Direct labor costs Overhea d costs 9,000 11, ,0 00 Selling and administrative costs 20,000 $45, ,0 00 Required: A. Calculate raw materials used for July. B. Calculate cost of goods manufactured for July. C. Calculate cost of goods sold for July D. Assume that sales revenue totaled $250,000, calculate net income for July. (ignore taxes) 95. Pearce Manufacturing Inc. incurred the following costs in February: Direct labor $40,000 Advertising costs $1,000 Indirect labor 15,000 Factory rent 4,000 Administrative salaries 8,000 Factory depreciation 2,000 Raw materials purchased 10,000 Administrative rent 3,000 Indirect materials used 4,000 Administrative depreciation 1,000

28 In addition, the following information is also available: Raw materials $ 2,000 $ 4,000 Work-in-process 25,000 18,000 Finished goods 4,000 12,000 Number of units produced Number of units sold (sales price of $25 per unit) 10,000 units 9,000 units Required: A. Calculate total period costs. B. Calculate raw materials used. C. Calculate cost of goods manufactured. D. Calculate the product cost per unit. E. Calculate cost of goods sold. F. Calculate net income. (ignore taxes) G. Calculate the remaining costs on the balance sheet at the end of February. 96. Creative Products Inc. incurred the following costs (in alphabetical order) during 2005 related to one of its products: Administrative costs $ 2,000 Advertising costs 1,000 Direct material used 8,000 Direct labor 20,000 Factory equipment depreciation 1,000 Factory rent 5,000 Indirect labor 3,000 Indirect materials 2,000

29 During the year, 3,000 units were produced out of which 2,750 units were sold for $30 each. Required: A. Calculate the total product costs incurred for the year. B. What is the product cost per unit? C. What is cost of goods sold for the year? D. What is net income for the year? 97. The following information is available for the Brown Company for the month ended July 31: Direct materials purchased $ 21,000 Direct labor (2,500 30,000 Indirect labor 3,000 Indirect materials 2,500 Office supplies expense 100 Factory equipment depreciation 2,000 Office Equipment depreciation 750 Administrative expenses 20,000 Office utilities 75 Factory utilities 200 Marketing expense 2,500 Sales revenue 150,000 Sales commissions expense 1,500 Direct materials inventory $27,000 $ 24,500 Work in process inventory 25,000 29,000 Finished Goods inventory 22,000 15,000 Required: A. Determine the direct materials used in July. B. Determine cost of goods manufactured in July. C. Determine cost of goods sold for July. D. Prepare an income statement for July. (ignore taxes)

30

31 Chapter 3--Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows Key 1. Which of the following types of organizations is most likely to have a raw materials inventory account? A. Retailer B. Manufacturer C. Service provider D. Governmental unit 2. Which of the following statements about manufacturing in a traditional environment is true? A. Factories are organized so that machines that are dissimilar are grouped together. B. It is not desirable for extra raw materials inventory to be on hand. C. The process begins with a customer order and products are "pulled" through the manufacturing process. D. Partially completed inventory is accumulated in a work-in-process inventory account. 3. A traditional manufacturing environment does not have which of the following? A. An automated production process B. Trained employees C. Extremely low levels of work-in-process inventory D. Product cost information available 4. Which of the following statements is true about manufacturing companies over the past 20 years? A. The grouping of machines into "manufacturing cells" has increased. B. Carrying large amounts of inventory is often less costly than carrying small amounts of inventory. C. They have moved from a "pull" approach to more of a "push" approach. D. The basic production process has changed very little over the past 20 years. 5. Which of the following statements regarding the traditional manufacturing environment is not true? A. Machines are often put into "manufacturing cells" whereby dissimilar machines are grouped together. B. Raw material is "pushed" to the next production area in anticipation of customer demand. C. Manufacturers often have raw material, work-in-process, and finished goods inventory on hand. D. Buffers of inventory may result in workers being less efficient.

32 6. Lean production is focused on eliminating waste associated with all of the following except A. moving products further than is required. B. down time caused by people waiting for work to do. C. providing excessive customer service. D. over-processing a product. 7. Under ideal conditions, companies operating in a environment would reduce inventories of raw materials, work-in-process and finished goods to very low levels or even zero. A. service B. just-in-time C. traditional manufacturing D. merchandising 8. Companies that operate in a lean production and just-in-time manufacturing environment are more likely to experience which of the following? A. Reduced manufacturing flexibility B. Increased levels of raw materials inventory C. Increased production time D. Increased product quality 9. A "manufacturing cell" is defined as a(n): A. grouping of most of the machinery and equipment needed to make a product being available in one area of the factory. B. grouping of the factory into areas where machinery and equipment of the same exact type are grouped together. C. area in the raw materials storeroom where similar raw materials are grouped together. D. area in the finished goods storeroom where similar finished goods are grouped together. 10. In a just-in-time environment, the production process often begins when: A. products are moved from raw materials to work-in-process. B. a customer places an order. C. the product is delivered to a customer. D. products are moved from work-in-process to finished goods. 11. Which of the following is an advantage of lean production and just-in-time (JIT) manufacturing systems? A. If factory workers go on strike, the company can still deliver the product to the customer on time. B. The quality of the product is often improved. C. Less-skilled employees making a lower wage will replace higher paid employees. D. An increase in the production time to make a product.

33 12. Which of the following is a disadvantage of lean production and just-in-time (JIT) manufacturing systems? A. Increased customer delivery time B. Increased product defects C. Decreased flexibility of manufacturing facilities D. Increased reliance on fewer suppliers 13. Which of the following statements is true regarding the lean production and just-in-time (JIT) manufacturing systems? A. Customers are often less satisfied with the purchased product. B. The number of product defects often increases. C. The number of suppliers the company can purchase raw materials from often increases. D. The factory is often restructured where dissimilar machines are grouped together. 14. Which of the following is an advantage of the lean production and just-in-time (JIT) manufacturing systems? A. Reduced reliance on a select number of suppliers B. Increased inventory levels in case of unpredicted customer demand C. Reduced reliance on highly skilled employees D. Reduced product defects 15. Which of the following is a characteristic of a lean production and just-in-time (JIT) manufacturing environment but not of a traditional manufacturing environment? A. Increased inventory levels B. Increased product defects C. Increased reliance on a select number of suppliers D. Increased production time 16. Which of the following is a characteristic of a traditional production environment but not of a lean production and just-in-time (JIT) manufacturing environment? A. Increase in the need for highly skilled labor B. Increase in the need for highly reliable suppliers C. Reduction in the motivation of the work force D. Reduction in the amount of time it takes to produce a product

34 17. Which of the following is a risk that would more likely be seen in a lean production and just-in-time manufacturing environment than in a traditional production environment? A. Reduced customer satisfaction due to higher product defects B. Reduced raw material supply bringing the production process to a halt C. Increased inventory storage costs D. Increased production time resulting in lost sales 18. Which of the following is not a type of manufacturing cost? A. Direct material costs B. Administrative costs C. Factory overhead costs D. Direct labor costs 19. In general, costs incurred in the factory that do not qualify as either direct material or direct labor are called: A. manufacturing costs. B. manufacturing overhead. C. nonmanufacturing costs. D. selling and administrative costs. 20. Manufacturing costs typically consist of: A. direct materials, direct labor, and administrative costs. B. production and shipping costs. C. direct materials, direct labor, and manufacturing overhead. D. manufacturing overhead and selling costs. 21. Materials that can be directly traced to a particular product and become an integral part of the finished product are called: A. indirect materials. B. direct materials. C. supplies. D. product materials. 22. Which of the following statements is true regarding manufacturing costs? A. They will be appear on the income statement as the product is made. B. They will not appear on the income statement or the balance sheet until the product is completed. C. They will appear on the balance sheet as an inventory cost until the product is sold. D. They will appear on the balance sheet as an inventory cost after the product is sold.

35 23. Which of the following statements is false regarding nonmanufacturing costs? A. They are incurred outside the factory. B. They include selling and administrative costs. C. They are not directly incurred to make a product. D. They include indirect materials and indirect labor costs. 24. Which of the following would most likely be classified as indirect materials? A. Wood used to build a customized bookshelf B. Lubricants used on factory machinery C. Supplies used by the administrative employees D. Packing pellets used for shipping products to customers 25. Which of the following types of employees would most likely have their wage be classified as direct labor? A. Factory maintenance worker B. Factory supervisor C. Managerial accountant D. Assembly-line factory worker 26. Which of the following types of employees would most likely have their wage be classified as indirect labor? A. Factory supervisor B. Managerial accountant C. Salesperson D. Machine operator 27. Manufacturing overhead includes: A. advertising costs. B. indirect materials. C. sales commissions. D. shipping charges for finished goods. 28. Which of the following is not an example of a manufacturing overhead cost? A. Shipping charges on finished products B. Indirect materials C. Indirect labor D. Depreciation on factory equipment

36 29. Which of the following is an example of a manufacturing overhead cost? A. Supplies used by administrative staff B. Supplies used by a salesperson C. Materials easily traced to a specific product D. Lubricants used by factory maintenance workers 30. Which of the following is not an example of manufacturing overhead costs? A. Fringe benefits paid to assembly-line workers B. Depreciation of factory machinery C. Overtime pay to factory supervisors D. Insurance on factory machinery 31. Which of the following is a product cost? A. Insurance on factory machinery B. Insurance on delivery trucks C. Lease expense on office computer D. Advertising costs 32. Jasper Corporation Jasper Corporation incurred the following costs in April: Salesperson's salaries $40,000 Factory maintenance worker $20,000 Factory insurance 12,000 Administrative utilities 4,000 Factory supervisor salary 30,000 Administrative supplies 1,000 Advertising 15,000 Delivery truck insurance 2,000 Factory machine operator 22,000 Factory machine depreciation 6,000 Direct materials used 25,000 Receptionist salary 18,000 Refer to the Jasper Corporation information above. Total product costs are: A. $130,000 B. $155,000 C. $115,000 D. $117, Jasper Corporation Jasper Corporation incurred the following costs in April: Salesperson's salaries $40,000 Factory maintenance worker $20,000 Factory insurance 12,000 Administrative utilities 4,000 Factory supervisor salary 30,000 Administrative supplies 1,000 Advertising 15,000 Delivery truck insurance 2,000 Factory machine operator 22,000 Factory machine depreciation 6,000 Direct materials used 25,000 Receptionist salary 18,000

37 Refer to the Jasper Corporation information above. Total period costs are: A. $86,000 B. $38,000 C. $40,000 D. $80, The type of costing that takes into account costs incurred by all the activities throughout a product's entire life is called: A. life-cycle costing. B. value-chain costing. C. full-costing. D. complete-costing. 35. The set of activities that increases the value of an organization's products and services is called the: A. activity chain. B. value chain. C. profit chain. D. life chain. 36. Which of the following statements regarding life-cycle and/or product costing is true? A. Life-cycle costing is confined to direct materials, direct labor, and manufacturing overhead. B. Life-cycle costing would include research and development costs, advertising costs, and shipping costs. C. Product costing would include marketing and distribution costs. D. Product costing would include research and development costs, direct materials, direct labor, and manufacturing overhead. 37. Which of the following is an "upstream cost" in the value chain? A. Advertising costs B. Sales staff salaries C. Shipping costs D. Research and development costs 38. Which of the following is a "downstream cost" in the value chain? A. Research costs B. Shipping costs C. Production costs D. Product design costs

38 39. Products and their costs flow through a production facility in the following order: A. Work-in-process, finished goods, cost of goods sold B. Raw materials, work-in-process, finished goods, cost of goods sold C. Work-in-process, raw materials, cost of goods sold, finished goods D. Work-in-process, cost of goods manufactured, cost of goods sold 40. Which of the following increases the work-in-process account? A. Cost of goods sold B. Raw material purchased C. Administrative costs D. Raw material used 41. Which of the following decreases the work-in-process account? A. Raw materials used B. Cost of goods manufactured C. Direct labor D. Manufacturing overhead 42. Product costs that transfer into finished goods inventory are called: A. cost of goods manufactured. B. cost of goods sold. C. period costs. D. raw materials used. 43. Product costs that transfer out of finished goods are called: A. work-in-process. B. cost of goods manufactured. C. cost of goods sold. D. period costs. 44. Which of the following statements accurately describes manufacturing cost flows in a just-in-time (JIT) environment? A. Direct labor and overhead are maintained in a work-in-process account for long periods of time. B. There is little need to maintain a cost of goods sold account. C. There is little need to maintain raw materials, work-in-process, or finished goods accounts. D. Manufacturing costs are maintained in the finished goods account for long periods of time.

39 45. Which of the following types of companies would be the least likely to have the following cost pattern? Raw materials Work-in-Process Finished Goods Cost of goods sold A. Tire manufacturer B. Computer software manufacturer C. Retailer/merchandiser D. Construction company 46. Clyde Retailer's is a local merchandiser which buys vintage clothing and sells it to local college students. Clyde began the year with inventory costing $60,000. During the year inventory costing $300,000 was purchased. At the end of the year, inventory costing $45,000 still remained. What was Clyde's cost of goods sold for the year? A. $255,000 B. $285,000 C. $300,000 D. $315, The journal entry to record raw materials used would include a: A. debit to finished goods. B. debit to raw materials. C. debit to work-in-process. D. debit to cost of goods sold. 48. In 2009 Bradshaw Inc. incurred $40,000 of manufacturing overhead costs which will be paid for in 2010 Which of the following would be the correct journal entry to record this transaction? A. Cost of goods sold 40,000 Accounts payable 40,000 B. Inventory 40,000 Accounts payable 40,000 C. Overhead expenses 40,000 Accounts payable 40,000 D. Work-in-process inventory 40,000 Accounts payable 40, The journal entry to record cost of goods manufactured would include a: A. credit to work-in-process. B. credit to finished goods. C. debit to work-in-process. D. debit to cost of goods sold.

40 50. When the cost of a product is matched with its sales price, the result (difference) is called: A. net income. B. gross margin. C. cost of goods sold. D. cost of goods manufactured. 51. When nonmanufacturing costs are subtracted from gross margin, the result is called: A. cost of goods sold. B. net income. C. sales. D. nonmanufacturing income. 52. Michael's Manufacturing, Inc. Michael's Manufacturing, Inc. has the following information available for the month of July: Raw materials inventory $50,000 $ 62,000 Work-in-process inventory 80,000 55,000 Finished goods inventory 24,000 35,000 Raw materials purchased $120,000 Direct labor costs 60,000 Overhead costs 45,000 Refer to the Michael's Manufacturing, Inc. information above. Raw materials used for July is: A. $112,000 B. $108,000 C. $120,000 D. $132, Michael's Manufacturing, Inc. Michael's Manufacturing, Inc. has the following information available for the month of July: Raw materials inventory $50,000 $ 62,000 Work-in-process inventory 80,000 55,000 Finished goods inventory 24,000 35,000 Raw materials purchased $120,000 Direct labor costs 60,000 Overhead costs 45,000

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